Retirement Gloom

Millions of Americans are revising their retirement plans after watching their 40l(k) accounts dwindle in the worst economic slump since the Great Depression. The system urgently needs a fix.

Some workers now expect to postpone retirement. Some retirees are going back to work, if they can find work in these times. Some employers have suspended their voluntary matching contributions. Many nest eggs have lost nearly half their value. Many accounts were skimpy even before the meltdown began. The Congressional Budget Office put paper losses at $2 trillion.

Some question whether the 401(k) plans were a good idea in the first place. They supplanted traditional “defined benefit” plans in which employers promised fixed monthly lifetime payments to retirees, based on salary level and years of service.

When workers began changing jobs often and employers sought greater flexibility, Congress established the 401(k) system in 1978. It put employees in charge of their own retirement financing. The magic of compound interest and a generally booming stock market, plus generous tax benefits helped build accounts and pleased many on both sides. Two-thirds of employees with retirement coverage now have 401(k)s, while only 20 percent have traditional pensions.

But many employers gave little investment advice and some encouraged putting too much into their own company’s stock. Many employees knew little about investing and hadn’t heard the common rule that the proportion of bonds in a portfolio should nearly match the age of the investor. When the stock market tanked, many bonds fared better.

Disappointed 40l(k) holders have been getting conflicting advice on whether to hold onto their depressed stocks in hopes they will come back or sell them at a loss and buy bonds. Those who are elderly or nearing retirement don’t have long to act.

One change being considered would junk the 401(k) program and substitute “government retirement accounts” for all workers. They would get a $600 annual inflation-adjusted federal subsidy and would have to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money would be invested in special government bonds. The author of the proposal, Teresa Ghilarducci, an economist at the New School for Social Research, testified that the change would remove current 401(k) tax breaks said to amount to $80 billion a year.

Jane White, president of Retirement Solutions LLC, said the proposed change would “make a flawed system more flawed.” She would retain employee investment, require a larger employer match, and rely on a generally rising stock market to build retirement accounts.

Neither solution offers much hope to those with collapsed 401(k)s. It is up to the new Congress to devise a retirement system that will keep American workers from retiring into poverty.